Problem 14-18 Top executive officers of Zottoli Company, a merchandising firm, a
ID: 2362286 • Letter: P
Question
Problem 14-18 Top executive officers of Zottoli Company, a merchandising firm, are preparing the next years budget. The controller has provided everyone with the current years projected income statement. Sales revenue $2,000,000 COGS $1,400,000 Gross Profit $600,000 S & A expenses $260,000 Net income $340,000 Cost of goods sold is usually 70% of sales revenue, and selling and admin. expenses are usually 10% of sales plus a fixed cost of $600,000. The president has announced that the company's goal is to increase net income by 15%. A. You can use the contribution margin ratio to determine sales. Contribution margin ratio= sales (100%)- variable costs (80%)= 20% (net income+fixed cost) / CM ratio=???+???/ 20%= $??? Pro forma income statement sales revenue-??? COGS-??? gross profit-??? S&A; expenses-??? Net income-??? %increase required=????% B. Budgeted cost of goods sold with a 2%cut: $1,400,000 *98%=$1,372,000 Budgeted gross profit: $2,000,000 -$1,372,000= $628,000 The budgeted level of selling and admin. expenses: $628,000-391,000=237,000 Pro forma income statement Sales revenue-??? COGS-??? gross profit-??? S&A; expenses-??? net income-??? The figure means that management has to cut the selling and admin. expenses by??? in order to reach the presidents goal? C. Projected sales revenue to increase by 15%: $2,000,000 *115%=2,300,000 Projected cost of goods sold :$2,000,000 * 70%= $1,610,000 Pro forma income statemnet sales revenue-??? COGS-??? gross profit-??? S&A; expeses-??? Net income-??? The company can/cannot reach its goal?Explanation / Answer
A. Projected Net Income = 340,000 Required increase 340,000*15% = 51,000 So Required Profit = 340,000+51,000 = 391,000 Let required sales be x Cost of goods sold = 0.70x Selling expenses = 0.10x Fixed Cost = 60,000 Total Cost = 60,000+0.7x+0.1x Sales = x Profit = x-(60,000+0.7x+0.1x) = 391,000 x-0.8x = 391,000+60,000 0.2x = 451,000 x = 451,000/0.2 = 2,255,000 Required Sales = 2,255,000